5 reasons why Novelis will be the success story of 2015

Increased use of aluminium in cars, global expansion to drive the company's fortunes

Kumar Mangalam Birla-owned Hindalco faces challenges at home — fighting Central Bureau of Investigation cases and de-allocation of mines — but its North America-based subsidiary, Novelis, is set for a revival of fortunes in 2015, thanks to the increased use of aluminium by Ford, the American car major.

Ford has launched a new car called the F-150, with an aluminium body and engine. This has shaved 30 per cent off the car’s weight and made it more fuel-efficient. This can be a game-changer for the automobile sector in the US, which is cutting costs due to economic slowdown. Ford claims the new car is 30 per cent more fuel-efficient than earlier versions. Ford plans to produce 850,000 units of F-150 cars and will need about 350,000 tonnes of aluminium sheets.

Company officials had earlier told Business Standard  Novelis was betting highly on recycling. Both Ford and Novelis are working closely to recycle scrap generated from automotive body-making processes using aluminium sheets.

Following the success of its strategy of using a closed-loop system in Europe for Jaguar and Land Rover, Novelis is using the same technology with F-150 in the US. According to an Axis Capital report, Novelis and Ford have an agreement that allows the Birla company to recover a big chunk of its aluminium costs by selling the scrap back to the former for recycling and then buying it back in the form of sheets. This results in both reusing the scrap, reducing wastage.

Novelis has invested close to $2 billion in the past two years to expand capacity. Of this, $500 million has been invested to increase its recycling capacities. The company aims to use 80 per cent recycled content in its auto sheet business by 2020, up from less than 10 per cent five years ago. If the rest of the auto industry follows suit, Novelis will have first-mover advantage.

Novelis recently commissioned its new auto line in China. Two expansions in the US and Germany are expected to be commissioned by the end of 2015. With this, the company expects the auto segment to account for 20 per cent of sales volume by FY17. Axis Capital says the volume share of aluminium in auto body and closure parts, currently two per cent, is expected to rise to nine per cent by 2016 and 26 per cent by 2025. When the tide turns, Novelis will be poised to ride it.

Hindalco’s consolidated Ebitda, or earnings before interest, tax, depreciation and amortisation, is expected to double in three years, led by favourable product mix at Novelis, doubling of aluminium volume and cost reduction, said the Axis Capital report.. It’s also time now for Hindalco to earn dividend from Novelis after investing a massive $6 billion in it.